BRF SA (BRFS) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time.

[Operator Instructions]

I would now like to turn the conference over to Ms. [Daniela Ueda] of Financial Investor Relations Brazil. Please go ahead.

Good afternoon ladies and gentlemen and welcome to Sadia's conference call to discuss its third quarter 2006 results. I would like to mention that a slide presentation has also been made available on the company's website at www.sadia.com, under the investor relations section.

Before proceeding, let me mention that forward looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1995. Actual performance may differ materially from that anticipated in any forward-looking comments as a result of microeconomic conditions, market risks and other factors.

With us today in [inaudible] this afternoon are Mr. Welson Teixeira Jr., Investor Relations Officer and Ms. Christiane Assis, Investor Relations Manager. First Ms. Assis will comment on the companies third quarter 2006 results. Afterwards she will be available for our question and answer session. It is now my pleasure to turn the call over to her. Ms. Assis, you may now begin.

Thank you, Daniela. Good afternoon to all. I would like to-before we begin-pass the word over to Mr. Welson who will briefly introduce himself.

Hello, good afternoon. I would like to say welcome to everybody. Thank you for attending this conference regarding Sadia third quarter results. As you know, I've been working for Sadia for 30 days and thus, because I'm in the learning phase about the main process and activities of the company. In this way, Christiane Assis our Investor Relations Manager will do the presentation and I will be available for questions at the end of the presentation. Thank you.

Okay, let's begin. This slide, gross operating revenue, we see for the nine months of '06 in relation to the nine months of '05 a decline in gross operating revenues of 8%. Basically, this decline was due lower revenues in the export market, which suffered. A couple of variables, especially during the first semester of this year, those being the Asian flu crises which lowered demand for poultry, worldwide; the Russian ban on Brazilian pork and the devaluation of the U.S. dollar against the Real during the period. Plus the percentage of exports in the total revenues of Sadia reached 44%, this number being below what management believes to be strategically interesting for the company, of a breakdown of 50/50.

We also believe that due to the start of the recovery during the third quarter and continuing recovery especially in the export market in the fourth quarter that as of the fourth quarter we will start to see this number, the 44% starting to return to normalized levels of around 50%.

Next slide. Highlights, third quarter '06 against '05. We will during this presentation compare this quarter with the third quarter '05 last year. I would at this point like to mention that we will due to this quarter being very distinct from that of last year, we are comparing two very different scenarios. This quarter being one of recovery from a very tough first semester and last year's quarter being one of-which presented a very high demand in terms of the export market.

Thus, when we compare the gross operating revenue of both quarters we see a decline of 4% and we see a decline in EBITDA of almost 37%. Again, due to these distinct quarters, we would like to during our presentation, show a recovery from the second quarter of this year. And thus, we will also compare our numbers in relation to the second quarter of this year.

In the next slide, we start to see this recovery. Gross operating revenues, a very healthy growth of 15.5% in relation to the last quarter. EBIT a growth of almost 3,000%. Net income 300% and EBITDA 142%. It is worthwhile to mention that the $164 million Reals of EBITDA reach during the fourth quarter represent more than all of the EBITDA reached during the first semester of this year.

Moving along, gross operating revenue. Total for the company basically shows any accumulated of this year, the company continues to direct its efforts in selling more processed products. Products [fees] that have higher margins, 44% nine month '05 against 50% nine month '06.

Next slide, in the domestic market the revenues in the accumulated for the first nine months of this year against last year were up 4.5%. And again, revenues in the domestic market are basically concentrated 80% in our processed products line.

Next slide, export market. Export market we would like to give a special highlight in the beef sector. As you all know Sadia returned to the beef segment as of last Q, last year and has been steadily rising its sales in this segment. Reaching now 7% of revenues for the export market. The pork segment as you might noticed has retracted some basically due to the ban of Russian pork coming from Brazil.

Next slide. Export by region, continued to be very diversified in terms of geographic location with no one sector responding for more than 26%.

Next slide. Sales volume in terms of tonnage. When we compare third Q '06 with last year we see an increase of in total sales volumes of 0.5%. With special highlight for the domestic market where we see an increase of 13.5% and in the process products which respond to 80% of our revenues for this market of almost 12%.

When we take a look at-next slide-volume change against revenue change, we see a total increase in volumes as mentioned before of 0.5%, but revenues decrease 4%. In the domestic market we see a growth of 13.5% in volumes and a revenue increase of 5.6%. This continues to reflect the company's large efforts to try to pass along prices in the domestic market.

Next slide. In terms of comparing the third quarter with the second quarter, we see a very nice growth in total sales volumes of 5% with a special impact coming from the export market with a growth of almost 10%. As pointed out before and as we have been mentioning during the last couple of months, management believed that the second Q was the worst in terms of demand that the company reached historically and that as of the third quarter and the second semester the company will already show a tendency of recovery in external demand, especially for poultry. The 6.6% here shows this recovery and a tendency to continue to rise during the next quarter.

Next slide. In terms of percentage change in volume and revenues, again we see a very steady change in volume of 5% in the total and a 15.5% increase in revenues. With the main highlight being beef, export market 10% increase in volumes, while we have a 27% increase in revenues. It is interesting to notice that all of the segments which the company exports, process products, poultry, pork and beef all raised their revenues more than volumes in comparison to the second Q. Not only was the export market very good in comparison to the second Q, we also have a recovery of the domestic market in relation to the second Q, percentage volume change of 0.5% and revenues change of 7%.

Next slide. We take a look at average prices for the domestic market. One second please [audio gap - music playing]. In terms of average prices the domestic market, the main segment for the domestic market is processed products with nearly 80% of our domestic revenues. Please notice that during the first semester the prices have gradually been falling. Basically this fall during this year, was due to an over supply of alternative animal protein in the domestic market, which came from the crises, which I've already mentioned of the Asian flu and pork ban in Russia.

We also see that the third Q process products price in relation to the second Q is basically flat, which shows also the recovery of the other segments in the domestic market. When we look at poultry, we see an increase of price from the third quarter in relation to the second quarter of almost 20%. This increase is still below that of the number which was presented during the third Q '05. We also see third quarter pork price below that which was presented during the third quarter '05 of 12% below.

Next slide. Average prices export market. The poultry segment represents 70% of revenues in the export market. When we look at the prices in poultry, we see the lowest price being during the second quarter and a very strong recovery for the third in relation to the second quarter. Third quarter '06 in relation to third quarter '05 is still 5.6% below in terms of Real prices. But if we consider a devaluation of the dollar, of almost 7% during the period, we have an increase in dollar prices of almost 1%, which again shows the recovery of this market in relation to the previous quarters.

I would also like to point out that that process prices for processed products in the export market have been rising continuously. And basically that is due to the fact that the mix of this segment has gotten better, has improved. When we see that there is a rise of 4% in relation to third Q '05, when we take this number and turn it into dollar numbers this is almost a 10% increase in terms of dollars. In terms of pork prices, we also see recovery in terms of previous semester '06, but still below third quarter '05, almost 12%.

Next slide. Sadia continues to rank first in all segments in which it participates, frozen processed products a market share of 43%; refrigerated processed products a market share of 31%; margarine a participation of 38% of market share; chicken 14.2%; turkey 65% and pork 12%.

During this year-next slide-the new product releases have been lower than that average in previous years. Basically due to the lower external demand during the first semester. But still we had 27 new product releases until September. We expect that as of next year we will be again reaching historical levels. A couple of our new releases are the hotdog flavored nuggets, pepperoni and cheese chicken bits, cheeseburger and cheese chicken burger hot pockets.

Next slide. The chicken carrot lasagna which is made of soy. The margin flavored cheese, turkey and honey, smoked chicken breast chicken flavor and fine herb and pepperoni pates. And the special beef cuts for the food services line. We are very proud to announce that recently Sadia in the [Sialle] food expostion in Paris, the Sadia's hot pocket won the best of Brazil. It was selected as the most innovative product in the country. Also we had two other products that won the [zita] soya line as well as the hotdog flavored nuggets won the innovation and the trend prizes respectively.

Let's speak a little bit about the margins. Gross margins, historically, Sadia's gross margin have fluctuated around 29%. We see this margin decreasing for the reasons that we have already mentioned during the first semester of this year, reaching a rock bottom 20.6% for the second Q and already during this third quarter returning to 25%. We expect this recovery to continue and we expect that already during the fourth quarter the gross margin will return to historical levels.

Next slide, sales expenses. Historically, Sadia had sales expense margin of around 19%. After effort of the management to lower this number during 2003 to 2005, presented a new level of sales expenses around 17%. During this first semester that number rised again to around 19% basically due to lower revenues. When we start to recover the level of revenues, especially now during the third Q, we will already see that number to start to decline again to historical levels.

Net income, next slide. Net income, we see the second Q as being 1.1% very low. But it is important to mention here that Sadia and one other-only one other company worldwide attained a positive net income during the second Q '06. We see already a tendency of recovery during the third Q reaching $69 million Reals.

EBITDA, the same can be seen for EBITDA and EBITDA margins. We see an EBITDA margin of 4.4% for the second Q and 9.2 more than double that of the second Q for the third quarter. The 165 million EBITDA number for the third quarter represents more than that obtained during the whole first semester of this year.

Moving along, Capital Expenditures. The management of the company, believing that the sanitary crisis is something momentary, did not lower its level of investments. We had announced last year that investments this year would be $850 million Reals, we have up to this moment invested $800 Reals million and expect to finish the year by $900 Reals.

Next slide. This confidence of course, raised our net debt which given the lower cash generation made our debt increase to 1.2-our net debt to R$1.2 billion in September. This level represented 53% of our net debt to equity. This level being still substantially below our peers. I would also like to mention that as of the fourth Q we expect this level to return to below 50% limit this established by the board.

Next slide. The same I can mention for net debt to EBITDA. Limit established by the board is 2, we are now at 2.1. The limit that we also expect to return to levels below 2 by the fourth quarter.

Our value at risk. This is a slide that you are already familiar with. We are currently at 3.2% of bar level which is very comfortable.

In terms of our preferred stock, Sadia continues to rise its liquidity in the stock markets with a special highlight to the New York Stock Exchange, which reached a $2 million daily average traded volume and [inaudible] with EUR225,000 average daily traded volume. This rise in the foreign markets came to increase the foreign investor's participation in Sadia's preferred stocks to 56.4%.

Next slide. In terms of some highlights. Sadia 2005 annual report ranked second amongst the best annual reports of 2005. This prize given by the Brazilian Association of Publicly Held Companies. The company also won the Trusted Brand Award for the third consecutive year. Sadia was appointed as the most trusted brand of ready made meals of Brazil 2006 Major End Leaders for the second year in a row. Sadia ranked 7th among the 500 largest companies of the Southern Region of Brazil and also won the Top of Line 2006, won the second brand most remembered by interviewees of the State of Parana.

We would like to also mention some of the renovations that occurred in our executive level at the company, during the last couple of weeks. Mr. [Abreano Tahira] which was the finance manager becomes the finance director with report to the board of directors. The processed products director, Mr. [Barowa Averachi], continues with us, there is no change. The same for the Supply Director, Mr. [Savlagi] which has been with the company for over 20 years. The Agricultural Manager, Mr. [Osazala Obello] became a Director. Mr. [Antanio Listonie] became the Director responsible for the beef segment. We have Mr. [Sanjio Sasioka ]responsible for domestic market. Mr. [Jubest Jubuea] which was previously the marketing director responsible for the export market. Mr. [Jubest Sanpio] which has recently joined the company responsible for domestic and international marketing. We have Mr. Welson Teixeira, responsible for investor relations. And as of January Mr. [Clado Piano] will be retiring and Mr. Welson will assume controller, administrative and information technology responsibilities. We have in Human Resources, [Edwardo Duloara] which was a manager and is now the director responsible and investment projects, Mr. [Flabich Mich] which has been many years with the company. And for institutional relations the former export market director now responds for institutional relations.

That is the end of my presentation. I would like to open our session to questions.

Thank you, ladies and gentlemen. We will now begin the question and answer session. [Operator Instructions].

Our first question comes from Mr. Christopher Langner with Merger Markets.

Good afternoon Ms. Ueda, I would like to ask two questions real quick. The first one is related to Sadia's sale bid for Perdigao, you raised a fair amount of cash at that time and it has been said that Sadia would look at other acquisitions, maybe having all the backing. And considering the Newcastle and Asian flu hit harder probably your peers than Sadia itself, I would say there are plenty of acquisition targets out there, besides. Within the same question I would like to know if such if Sadia considers acquisitions to expand its present in the meet market. And my second question is related to the management changes and I'd like to know if there is any relation to succession issues on these management changes.

Okay. In relation to the sales bid, there wasn't specially money raised at the time. Okay. The cash raised by Sadia during this year was geared toward our investment plans as mentioned before of almost R$800 million, in diversity and various investment plans. In terms of the beef market there were also investment plans but nothing, very substantial. In terms of management changes, we have only three actually, two new directors coming from outside Sadia's team. The other directors were already part of the Sadia team, or they were responsible for different areas or they were managers inside that area.

I'm sorry, so just to state back the question, so does Sadia consider making new acquisitions to feed its international presence or its presence in Brazil and if any opportunities show up due the Asian flu and does Sadia consider any acquisitions to feed its presence in the beef market?

Well, we are always open to good opportunities.

[Inaudible - microphone inaccessible] invest some solution is a joint venture that we are doing there, but you open to start to acquisitions we decide it for the growth of the company.

Thank you very much.

And our next question comes from Alex Robarts from Santander. Please go ahead with your question or comment.

Thanks, hi everybody. I guess my two questions would be pretty much on the exports. And the first one is just to revisit and get a feeling for your guidance. I know around May you guys have been talking about volume guidance around the 7.5% number for '06. And I guess that was 12% domestic, kind of 3% export split. It looks like your tracking below that on the export, slightly above on the domestic.

Are you guys sticking to the 7.5% for this year and if not what could be the perhaps a new level of guidance. And to the extent that we come up short or have a decline this year in the exports, how important has Egypt been for you in July in this quarter and is that a market that holds some further growth down into next year.

Okay. Alex, in terms of guidance, we haven't changed our guidance. Maybe just I'd like to mention that it was the other way around, stronger number for the domestic market and a weaker number for the export market. So 10% guidance in terms of volume growth for the domestic market and 5% for the export market.

Okay, so in other words it looks like-.

I apologize it was 12% for the domestic market and 3% for the export market, those are the correct numbers.

Right.

For the year.

Are you sticking with those numbers?

Yes we are.

You are, okay. So, that really implies a significant increase in export in the fourth quarter, is that a fair assumption. Like, I mean, kind of double digit year-on-year growth, is that something that you guys are comfortable with?

Well, we already see a firm growth trend of recovery in the third quarter and we expect that trend to continue for the fourth quarter.

And how important has Egypt been in the third quarter overall. Is this something that can grow in to a bigger market for you guys.

Well, it's hard to say right now. Egypt came as a nice surprise during the second semester. As you might know, they had avian flu crises and 70,000 producers and distributors of chicken closed in that market and they opened the market not only to Brazilian exporters but to other exporters of chicken. The market is open until the end of the year and we still don't have information as to whether this market will continue with the same strength as of next year.

Okay. And I'm sorry, just the second question really relates to just your impression here on the trip to Russia, it look like it's got a mission set to go out to Russia next week. And I guess this is just a sense of-do you think this could be a fruitful trip. Do you think we could see the embargo being lifted sooner rather or later, or any kind of comments on that in terms of Russia.

Well, it is hard to say at this moment, so I wouldn't like to speculate in terms of whether the Russian embargo will be lifted or not. We are working very hard and there's not much more than that that we can say. Okay?

Thank you.

[Operator Instructions]

Our next question comes from Ms. Juliana Rozenbaum with Deutsche Bank.

Hi, everyone. I want talk for a little volume for poultry in the export side. You've seen a very good recovery in prices but as much in volume. Can you spend a little bit what is happening there, why prices are picking up so strongly quarter-for-quarter and you're not seeing the same kind of recovery in terms of volumes? And additionally what would impact going forward with volumes recover and prices maybe go down or stay at same levels.

Juliana, we had a couple of factors which helped to normalize the market during the third Q. We had again the nice surprise of Egypt which helped to normalize some of the stocks that Brazilians had. We also saw return of demand for poultry in Europe. We also saw the Iraqis withdrawing the ban that they had on poultry during the first semester.

It was a series of factors which helped and it is still helping to normalize the fallen market for poultry. In terms of prices, we see prices recovering to those levels in dollar terms as of last year. But in terms of volumes, we are still a little bit below volumes of last year. And why is that? We are comparing two distinct quarters; the third quarter '06 is one of recovery of a very weak first semester. The third Q '05 is a quarter where the worldwide demand for poultry was very strong. So it is hard to compare these two quarters. But I guess I can say is that the trend is positive and we expect to see volumes to continue to increase in this segment during the fourth quarter.

Yes. Well, I understand your comments I was just trying to figure out what really happened in the sense where prices went up so much, but you are still seeing the same trend year-over-year that on the second quarter in terms of volumes you're seeing that on the third quarter in terms of volumes down like 8 and 9%, year-over-year. So it doesn't show really sequential-improvement on a year-to-year base, even it you compare second quarter to the third quarter. So, all things being said about that is just [inaudible] and all that that would also imply an increase in demand so higher volumes.

I don't know [inaudible] a little bit further in there. I'm not sure I understand your question. The demand is recovering. Okay? We have also new markets which were opened. But again, it is not-demand has not reached the same levels that it was last year. And thus we the volumes exported for poultry in the external market are still 8% below what they were last year. But, we do see a recovery in relation to the second quarter. A recovery of almost 6.6%, with a greater recovery in terms of prices.

Okay. Yes, maybe then follow-on question on your Cap Ex. The fact that it increases Cap Ex for 2006 by a little bit, does that mean you are anticipating any of the investments, or will that change your estimate for capacity coming on stream next year. And would you update us on the number on the increase for the further capacity you should issue down stream in 2007?

Absolutely, the 850 level to 900 levels is very small number, its only fine tuning in terms of our investments. It's nothing very expressive.

Can you give an update of capacity coming on stream next year? How much capacity will be growing in 2008 given you're also planning on increase in Cap Ex in 2007?

Juliana we have still not mentioned investments for '07. Investments for '07 are still under discussion with the board. We will be releasing those numbers probably in December where we will have more details in relation to the investments of '07. Okay, the 50 million increase is in relation to '06 and it is nothing more than what we have already mentioned in the past. It is an adjustment for the investments that are being done this year.

No, I understand, but in the previous call you did say that the levels of investment in 2007 should be more or less in line with investments made in 2006, even though you haven't provided us the actual number. And it's higher at least than what I had thought. So I was just wondering, what kind of capacity or higher capacity you are factoring in to have those higher Cap Ex figures.

Well, what we can mention right now is what you already know. Okay. Any increase in capacity will be released later. What we have given the investments in Mato Grosso. We have almost 50% increase in poultry and in terms of pork a 20% increase, by 2009.

How much of that should be operational in 2007?

One-third.

Okay, thank you.

Okay.

[Operator Instructions] This concludes today's question and answer session, Ms. Assis at this time you may proceed with your closing statements.

Well, I'd like to thank the presence of you all and we are available here if anybody would like to further answer or make us any questions. Thank you.

That does conclude our Sadia third quarter 2006 results conference for today. Thank you very much for your participation. You may now disconnect.